Predicting Gulf-Coast Oil Prices is Getting Harder

The price of oil on the Gulf Coast – home to half of U.S. refining capacity — is becoming increasingly tough to predict, a new report from Credit Suisse says.

The U.S. oil boom has kept prices in the Midwest at a steep discount to the global market for two years. But with relatively little of that oil finding its way to the Gulf Coast, refineries in Texas and Louisiana were still paying roughly the global rate for a mix of imports and oil produced in the Gulf of Mexico.

That’s starting to change. A barrel of Light Louisiana Sweet – the benchmark for high-quality Gulf of Mexico oil – costs about $12 less than Brent, the international benchmark, according to FactSet. As recently as Aug. 23, less than $1 separated the two.

Brent futures traded at $110.70 a barrel on Friday, about what they cost in late August. Louisiana crude prices, meanwhile, have fallen from roughly the same price three months ago to at $98.32 a barrel on Thursday. The difference in prices between the two is close to its biggest since at least 1991, according to Factset.

The unusual price gap is giving U.S. refiners an edge over their foreign competitors. They can buy oil for lower prices than refineries in Europe can, then convert it to gasoline and diesel and sell it at for cheap overseas.

But there’s a downside to cheap crude. Until this year, refiners could assume a handful of international benchmarks like Brent would determine the cost of oil from Houston to Oslo to Lagos. Now, U.S. refiners need to predict where many different local benchmarks will head next.

“The challenge is that…small imbalances can create wide price swings,” Credit Suisse said in its report.

Oil producers face the same problem. Investors may not want to back new shale-oil projects if the price that crude will fetch is unpredictable, Credit Suisse says.

Some analysts think the local price drop will fix itself. As refineries come back from seasonal maintenance, the prices of local and imported crudes on the Gulf Coast should correlate again, said Ed Morse, Citigroup’s head of commodities research.

Still, with so much oil pouring in from domestic fields and pipeline capacity struggling to keep up, local prices can change rapidly.

“By 2015, it’ll be a big problem because there will be too much crude with no place to go,” Mr. Morse said.